Macroeconomics – 6. The Warring Schools of Macroeconomics

  1. What are the three major questions about which the major schools of macroeconomics differ?
  2. Explain the difference between rational and adaptive expectations?
  3. What is the central policy implication of rational expectations theory?
  4. Use the Aggregate Supply-Aggregate Demand framework to contrast the adjustment process of the economy with adaptive versus rational expectations.
  5. Provide an economic and political critique of New Classical economics.
  6. Explain the Keynesian view of what causes macroeconomic instability.
  7. Explain the Classical-Monetarist view of what causes macroeconomic instability.
  8. Explain and illustrate the New Classical view of a self-correcting economy,
  9. Explain the Keynesian-based mainstream view of a self-correcting economy.
  10. Contrast the Monetarist versus New Classical views on the speed of adjustment of the economy.
  11. For the Monetarists, why does the enactment of a monetary rule make the most sense? Illustrate the Monetarists’ rationale for a monetary rule.
  12. Why do New Classical rational expectations economists also support a monetary rule?
  13. Provide the Keynesian defense of discretionary monetary policy.
  14. Provide the Keynesian defense of discretionary fiscal policy.
  15. Explain and illustrate “crowding out.”
  16. Summarize the Keynesian versus Monetarist views on the size of the crowding out effect and their policy implications.
  17. Why do Keynesian-based economists oppose a balanced budget rule?
  18. Summarize the Supply-side view of rules versus discretion.
  19. On what issues do the warring schools of macroeconomics converge?

Macroeconomics – 3. The Keynesian Model and Fiscal Policy

  1. What is the most important assumption underlying the Keynesian model?
  2. Illustrate the basic Keynesian model and a recessionary gap.
  3. What is a “leakage”? What is the most important leakage in the government sector?
  4. Define aggregate production. How is it represented in the Keynesian model?
  5. Define aggregate expenditures.
  6. What is the difference between autonomous consumption and induced consumption in the Keynesian model?
  7. Define the marginal propensity to consume and the marginal propensity to save.
  8. What is the slope of the aggregate expenditures curve?
  9. Why is the aggregate expenditures curve flatter than the 45-degree line in the Keynesian model?
  10. What are the determinants of investment?
  11. Discuss the role of transfer payments in the macroeconomy.
  12. What is a “closed economy”?
  13. Define the Keynesian expenditure multiplier. Why is it greater than 1?
  14. How is the Keynesian multiplier calculated?
  15. Suppose the United States permanently increases defense spending by $100 billion in response to a threat to the oil fields in the Middle East. What will be the effect of this increase in government spending on the gross domestic product, assuming the marginal propensity to consume is two-thirds?
  16. How much should taxes be cut to close a $100 billion recessionary gap, assuming that the marginal propensity to consume is .8?
  17. Suppose the economy is in equilibrium at $960 billion. But this is $60 billion above the full employment output of $900 billion. What do we call this situation? How would you use fiscal policy to address it, assuming a marginal propensity to consume of .75?
  18. Is it more preferable to increase government spending or cut taxes to eliminate recessionary gaps?
  19. Use the Keynesian model to explain the Great Depression.
  20. What is the paradox of thrift?
  21. What is crowding out?
  22. Illustrate the relationship between the Keynesian and the Aggregate Supply­Aggregate Demand models.

Macroeconomics – 2. The Aggregate Supply-Aggregate Demand Model and the Classical-Keynesian Debate

  1. The Classical versus Keynesian controversy is primarily a dispute over what?
  2. State Say’s Law.
  3. What was Thomas Malthus’ critique of Say’s Law?
  4. Use the circular flow diagram to illustrate Say’s Law.
  5. Describe the quantity theory of money.
  6. Explain the two major assumptions of the quantity theory of money.
  7. Describe the Keynesian income adjustment mechanism.
  8. Illustrate equilibrium in the aggregate supply-aggregate demand model.
  9. Explain the three reasons why the .aggregate demand curve slopes downward.
  10. List at least five major reasons why the aggregate demand curve shifts.
  11. Why does the aggregate supply curve slope upward?
  12. List at least five reasons why the aggregate supply curve shifts.
  13. Draw and explain the three ranges of the economy.
  14. Draw and describe the Classical price adjustment mechanism.